The news did not exactly come as a shock. Just two months before he was arrested on charges of insider trading on Oct. 16, billionaire Raj Rajaratnam described his job managing the New York Citybased Galleon Group hedge fund as "a business in which you eat only what you kill." And though his hunting methods may have just come under legal scrutiny in the U.S., in Sri Lanka, where Rajaratnam was born, the high-profile entrepreneur has courted controversy for years.

Rajaratnam, the world's 559th richest person according to Forbes magazine at an estimated worth of $1.3 billion, has long faced suspicions of financial misconduct in the island nation where he was born in 1957. He has been accused of being a supporter of the now-defunct Liberation Tigers of Tamil Eelam (LTTE) and of using his financial strength to gain a foothold on the Sri Lankan stock market and manipulate it to suit Tiger strategies to undermine the Sri Lankan economy. Though he has not faced any formal charges in Sri Lanka, Rajaratnam and the Galleon Group, the hedge fund he founded, have been linked by Sri Lankan financial authorities to a pending court case in which a sitting parliamentarian is among the accused facing charges of violating exchange control rules. (Watch a video about the final days of Sri Lanka's civil war.)

The defendants have been charged with depositing $3 million into a private bank without informing the Central Bank, per national banking laws. The deposit meant to buy shares of another private bank in Sri Lanka came from Galleon ($1 million) and Rajaratnam himself between Dec. 22, 2006, and Jan. 3, 2007.

In September, the Foreign Ministry also raised objections when Rajaratnam's name again cropped up, this time as a potential donor for a $23 million project aimed at rehabilitating former Tiger combatants. Rajaratnam had agreed to donate $1 million for the government project, funded by the governments of Japan and the U.S. and local business giants like Aitken Spence, Brandix, Ceylon Tobacco, Dilmah, Hayleys, John Keells, MAS Holdings and Unilever. "We initiated the program and the formal agreements were signed in September," Sarath Godakanda, an official at the Ministry of Justice and Law Reforms, told TIME. It was not clear whether the funds pledged by Rajaratnam had already been received. The International Organisation of Migration, the U.N. agency that is implementing the rehabilitation project, said that it was consulting the Sri Lankan government on a decision on how to move forward on the pledge made by Rajaratnam. (See the top 10 crooked CEOs.)

The Foreign Ministry had raised objections owing to Rajaratnam's suspected links with the Tigers and the Tamil Rehabilitation Organisation (TRO), another group that has been accused of being a front for the Tigers. Rajaratnam is believed to have donated over $2 million to the TRO, which has been banned in the U.S. and Sri Lanka since 2007. The organization has always denied that it is a front for the Tigers, arguing that it was engaged in charitable and humanitarian work in Tamil-majority areas in northern and eastern Sri Lanka during the civil-war years. The ministry had also shared a dossier on Rajaratnam with the U.S. Justice Department earlier this year.

The Central Bank of Sri Lanka said on Monday, three days after his arrest in New York City, that its investigations into Rajaratnam and his donations to the TRO were ongoing. "The Central Bank states that investigations are yet continuing in relation to the funding allegedly provided by Raj Rajaratnam to the TRO," the Bank said in an official statement. Rajaratnam's donations to the TRO had been closely monitored by Sri Lankan authorities, according to Sri Lankan security expert Shanaka Jayasekara, attached to the Centre for Policing, Intelligence and Counter Terrorism at Macquarie University in Sydney, Australia. "He had come to the attention of the Financial Intelligence Unit due to the funding," he says. (See pictures of the top 10 scared stock traders.)

Rajaratnam is a major foreign investor in the Colombo bourse individually as well as through Galleon. Rajaratnam has stakes in at least six banks listed in the bourse and in John Keells Holdings, the largest publicly traded company in the $10 billion market. The market fell 1.6% on Monday, the first day of trading after the Rajaratnam arrest. Brokers said the slide was a knee-jerk reaction to the arrest and could be weathered. "Sri Lanka is the flavor of the month and a lot of first-time international investors are coming in," says Murtaza Jafferjee, managing director at JB Securities, referring to the inpouring of investment brought on by the end of the island's decades-long civil war in May. (Read about Sri Lanka's postwar tourism boom.)

This week's fallout, however, would have been worse had Rajaratnam been arrested four years ago, when he was a more dominant force in the market. In 2005, when he made a move to shed some of his holdings, it too was met with the repetition of accusations that he was working on behalf of the Tigers. Just before Sri Lanka went to polls to elect a new President that November, Rajaratnam began selling shares. The move led to speculation that he had prior knowledge of a vote boycott forced by the Tigers in areas under the latter's control. In an August interview, Rajaratnam denied the accusations and said that the divesture of shares was a strategic move during an unpredictable period. "There is no truth in the speculation that there were other motivations for my trimming a small amount of my overall investments. I tune out these noises and stay focused," he told the LMD, a premier local business magazine. Jafferjee could not confirm estimates that the arrested billionaire may still have investments as high as $100 million in the Sri Lankan market.

In the same interview, however, Rajaratnam said he wanted to help rebuild civilian life in his homeland after over 2½ decades of war. "I would like to participate more actively in doing humanitarian work in Sri Lanka," Rajaratnam told the publication. "I am a firm believer that with success comes responsibility and the incredible power of possibility  a responsibility to help those less fortunate and the possibility of actually succeeding in making a difference." Whether he can make that difference from a U.S. prison cell remains to be seen.